ICS Commentary - U.S. Employment Cost Index, Q1 2011

ICS’ Barrington notes in quarterly commentary
Cornell University, ILR School: ICS Commentary - U.S. Employment Cost Index, Q1 2011
Monday, May 2, 2011

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Cornell University ILR’s Institute for Compensation Studies (ICS) noted today (Monday May 2, 2011) that 12-month employer costs for wages, salaries, and benefits in the private sector fell slightly this past quarter compared to last: from 1.8 percent to 1.6 percent. This was the first drop in five quarters of the Employment Cost Index (ECI) released quarterly by the U.S. Bureau of Labor Statistics.

The ICS Quarterly Commentary on the ECI pointed out that daily living costs for American workers are rising, gasoline and food costs in particular. However, the slack labor market continues to exert downward pressure on wages and salaries. ICS Director Linda Barrington cautions that “employers should consider the possibility that employees may feel less satisfied than anticipated with pay increases determined in last year’s lower inflation environment.”

This quarter’s Employment Cost Index appears to align with Federal Reserve Chairman Ben Bernanke’s April 27th statement that “increased commodity prices are unlikely to induce significant second-round effects in which inflation takes hold in non-commodity prices and in nominal wages.”

“This certainly is the case with today’s ECI,” affirms Barrington. “Inflation has not taken hold in workers’ pay. Compensation growth remains consistently soft.”

Surprising in the latest index published Friday April 29, 2011 is the deceleration in employer cost increases for health benefits, which slowed to 3.4 percent for the 12-month period ending March 2011. “One has to go back to December 1998 to find a lower 12?month percent change in employers’ cost for health benefits per hour worked.”

The ECI data do not reveal why this deceleration in year-on-year increases in health care cost per hour worked has occurred now. According to Barrington, “It could just be an artifact of more hours being worked as the economy recovers, but no immediate increase in the use of health care services. In a recovering economy, more hours are being worked, driving up the denominator in this index.” Other potential explanations include employees' lagged responses to bearing greater cost-sharing of health care expenses (after experiencing a year or two of higher co-pays, people may be changing their behavior in ways that reduce costs); or the possibility that insurance companies and service providers are finding cost-saving efficiencies in the face of pending legislative debates over health care reform.

“The real question is whether this deceleration is a blip or represents some real down-shifting in the acceleration of employer health care costs,” says Barrington.